Former Israeli Prime Minister Shimon Peres secretly agreed in November, 1985, to guarantee that Israel would not attack a proposed $1-billion Iraqi oil pipeline that had been promoted to Atty. Gen. Edwin Meese III by his longtime friend E. Robert Wallach, sources familiar with an independent counsel's probe of Meese said Friday.
To underscore his commitment, the sources said, Peres even pledged that--should the pipeline, which was to run near the Israeli border, be attacked--Israel would use future U.S. aid payments to cover the cost of repairs.
The extraordinary Israeli guarantee capped five months of top-secret efforts by the White House National Security Council and other U.S. agencies, apparently acting at Meese's request, to arrange financing for the pipeline, the sources said.
Avoiding Persian Gulf
Peres' promises were demanded by Iraq and the project's private backers as the key to obtaining outside financing for the project, which would have enabled Iraq to divert its oil exports away from the Persian Gulf. The traditional route through the gulf had left the oil shipments vulnerable to attack by Iran, which has been at war with Iraq since 1981.
The project's backers sought guarantees that Israel, long a bitter enemy of Iraq, would not sabotage the pipeline, the sources said.
Independent counsel James C. McKay is investigating whether the pipeline's financial backers had proposed payments to Peres to obtain his support.
McKay is focusing on a 1985 memo from Wallach to Meese in which Wallach cited a plan to make payments to Peres, sources have told The Times. Wallach represented Bruce Rappaport, a Swiss investor who was a primary financial backer of the pipeline project.
Two persons familiar with the project said Friday that the Wallach memo actually may have outlined plans--perhaps never carried out--to use Peres as a conduit for political donations to his Labor Party.
Investigators were questioning whether the payment plan violated U.S. laws, which bar U.S. citizens from bribing foreign officials, and whether Meese, the nation's chief law enforcement official, was legally obliged to take action to thwart it.
Meese Did Nothing
Meese, according to government sources familiar with the inquiry, did nothing about his knowledge of the proposal.
Sources have said that the memorandum raises such serious questions about Meese's conduct in the pipeline matter that it could erode even President Reagan's solid support for his embattled attorney general. But the White House, after initially calling the issue a serious matter, marshaled its backing for Meese Friday.
"The President has full confidence in Ed Meese," White House spokesman Marlin Fitzwater said. But he refused to comment on the independent counsel's investigation.
"Any matter that comes before the independent counsels is a serious matter," he said. "But we don't have any characterization or comment on independent counsel activities."
McKay went to the White House Friday to tell senior Reagan aides that his investigation of Meese has become very serious, the Washington Post reported, citing "informed sources."
The Israeli Embassy in Washington denied knowledge of any proposed payments. "No money or anything of value whatsoever has ever been offered or given to Mr. Peres or to the Labor Party by anybody involved in this project," embassy spokesman Yossi Gal said Friday evening.
Meese's attorneys also issued a statement Friday, saying that reports of the memo were "false in important respects." But they refused to describe the alleged inaccuracies, citing government secrecy laws and rules of evidence governing McKay's investigation.
Meese's chief attorney, Nathan Lewin, said in the statement that no detailed response was possible "because an investigation is under way and because relevant information is classified. And it is irresponsible to publish those erroneous allegations when they involve the delicate subject of foreign relations and impugn the integrity of respected foreign leaders."
No Denial of Memo
But Lewin's statement did not deny that Meese had received the memo or that he had read it. The Washington Post, quoting a source familiar with McKay's investigation, reported Friday that Meese had seen the memo but that it "did not alert him to any violation of law" and that "he bucked it somewhere else."
The potentially lucrative project collapsed in December, 1985, after John M. Poindexter, newly appointed to head the White House National Security Council staff, ordered it reviewed and then abandoned, several sources said.
McKay acknowledged for the first time Friday that he is looking into the Wallach memo to Meese.
"We have been investigating this matter for some time," he said outside the federal courthouse in Washington. "We hope to complete it within a reasonable period of time." He did not elaborate.
There is no known evidence that Meese benefited personally by aiding Wallach, a man often described as a name-dropper who boasted about his White House access.
Interviews with persons familiar with the McKay investigation depict a six-month whirlwind effort in 1985 by Wallach, Rappaport and senior White House officials to breathe life into the pipeline venture, which the National Security Council apparently saw as a step toward Arab-Israeli cooperation.
Rappaport, a multimillionaire oilman who is close to senior Israeli officials, was to have arranged financial backing and security guarantees for the project, which was to be built by Bechtel Group, the huge San Francisco construction firm. Rappaport would have held the rights to ship Iraqi oil from the pipeline's terminus at the Red Sea.
Wallach was retained by Rappaport to arrange American support with Bechtel and the White House, although one source said that he had also contemplated making a large investment in the project.
But sources said that these efforts would have been stillborn without the backing of Meese, who, one source said, gave Wallach entree into the "inner sanctum" of the Reagan Administration. "Without Ed Meese," one source said, "Bob Wallach might as well have stayed home in San Francisco."
Sources said that the effort began in June, 1985, when Meese introduced Wallach to then-National Security Adviser Robert C. McFarlane and asked him to help gain Israeli security commitments that could clear the way for the pipeline's financing and construction.
Clark Named Consultant
McFarlane, designating the project top secret, ordered aides to meet with Wallach and Rappaport to work out a plan under which an estimated $450 million would be pledged as security against an Israeli attack or any other effort to destroy the pipeline, sources said. He also asked William P. Clark, a former Reagan Administration national security adviser, to analyze the project as an unpaid consultant, they said.
Sources outside the U.S. government called the NSC role in the pipeline highly unusual. They noted that the White House office helps devise broad industrial and trade policies but virtually never involves itself in what one called "nuts-and-bolts" financing deals.
By that August, the project was in the doldrums. At Wallach's urging, NSC officials had approached a quasi-public agency, the Overseas Private Investment Corp., and invoked the White House's approval to request federally backed loan guarantees for the pipeline project.
Officials of the agency, which normally guarantees much smaller American investments in foreign factories, balked at both the scope of the deal and at the legal questions it raised and sent the guarantee issue to the Justice Department for analysis.
By one account, a Meese aide at the Justice Department eventually produced a legal rationale for the investment corporation to insure the Iraqi pipeline against Israeli attacks. But the corporation could not provide more than $50 million to $100 million of the $450 million in loan guarantees that were needed, and it eventually was dropped from the project.
By summer's end, the project had encountered a roadblock that eventually would prove fatal. Clark, several sources said, acquired a highly negative CIA profile of Rappaport, whose oil ventures in Indonesia and the Caribbean reportedly have been subjected to lawsuits.
Clark also developed suspicion of Wallach after learning that the San Francisco lawyer was using Clark's name and the White House's cachet to promote himself elsewhere. Clark asked McFarlane to order Wallach to stop trading on his name, and Clark ended his advisory role on the project.
Within Israel and the White House, however, the pipeline apparently had solid support, despite its financial problems, and a series of high-level exchanges that autumn appeared to dramatically improve its prospects.
In September, Peres is reported to have sent Meese a handwritten letter expressing Israeli hopes that the project would be built. The next month, Peres flew to the United States for discussions with Reagan and an address to the United Nations in New York, and one source said that he met with Meese and Wallach at Israel's embassy in Washington.
The topic of that discussion could not be learned. Within a month, however, Peres privately told the United States that Israeli forces would not attack the project, should it be built, sources said. And he agreed to post future allotments of American aid as insurance to guarantee that promise during the four to five years it would take to recoup construction costs.
Such a guarantee eventually would have required approval by both the President and Congress, officials said. Whether Reagan or congressional leaders were told of the deal could not be learned Friday.
Guarantee for an Enemy
Why Israel would wish to guarantee the integrity of a pipeline built by its archenemy, Iraq, also remains uncertain. One possibility was the alleged plan for cash payments to Peres or Israel's Labor Party, as described in Wallach's memo. Some sources speculate that Israel could have benefited from the control of Iraq's oil exports by Rappaport, one of Israel's richest and staunchest supporters.
In the United States, the National Security Council appears to have viewed the project as a means of generating oil-sale revenue for Iraq, helping maintain the balance of power in that nation's debilitating war with Iran.
In addition, the idea of joint Israeli-Arab cooperation on a large economic project was seen as a potentially promising lead in the search for a Mideast peace accord.
None of those benefits were to materialize, however. Only weeks after Peres delivered Israel's insurance pledge, McFarlane resigned as national security adviser. His successor, Poindexter, took office that December and asked Clark to review the project's merits.
"Clark killed it," one source said, by advising Poindexter that the project posed both national security dangers and potential legal or ethical problems for the White House. A flurry of appeals from Wallach failed to reverse the decision.
Iraq's interest in the venture also was waning, in part because it had discovered a cheaper and more secure way to move its petroleum by building a pipeline through neighboring Turkey. That pipeline later was constructed and, with a second line through Saudi Arabia, today carries most of Iraq's oil exports.